ISTANBUL: Turkey has not done enough policy tightening to support its lira, which tumbled to another record low on Friday, and the country鈥檚 FX reserves and external financing remain potential weak spots, according to Fitch Ratings鈥� key analyst.

Douglas Winslow, the agency鈥檚 primary Turkey analyst, told Reuters further pressure from the currency, double-digit inflation and depleted FX reserves 鈥渨ould significantly increase the chances鈥� of a formal interest rate hike by year end.
The lira slid as much as 1.7 percent to a record low of 8.56 versus the dollar, despite the greenback鈥檚 weakness as votes were still being counted in Tuesday鈥檚 tight US election.
Turkey鈥檚 bilateral ties could suffer if Democrat Joe Biden continues to gain ground and becomes US president, adding more pressure on the lira that has dropped some 30 percent this year and nearly 10 percent in the past two weeks alone.
The Turkish central bank raised rates to 10.25 percent in September and could tighten again to head off the depreciation and address inflation stuck around 12 percent.
Yet the tightening of credit in recent months 鈥渉as been insufficient to reverse the downward trend in the lira and (to a less extent) in foreign exchange reserves,鈥� Winslow, a director on Fitch鈥檚 sovereign team, said in an email.

Turkey is rated 鈥渏unk鈥� by the big three sovereign agencies. While Fitch鈥檚 rating of BB- is the highest, it revised the outlook to 鈥渘egative鈥� from 鈥渟table鈥� in August citing depleted FX reserves and weak monetary policy credibility.
Winslow said the central bank has 鈥渓imited independence鈥� from political pressure for lower rates and 鈥渁 track record of being slow to respond to events,鈥� raising the risk that too-loose policy stokes external imbalances and market instability.
Yet he was more sanguine for now about two main triggers for a possible ratings downgrade: The lira has not caused 鈥渟evere stresses鈥� in the external financing position of banks or corporates; and the trend in FX reserves 鈥渉as become somewhat less negative,鈥� he said.
The central bank鈥檚 net FX reserves fell to $16.8 billion last month, the lowest since 2004, from $41.1 billion at the end of 2019. Adding to the lira鈥檚 woes, Turks鈥� holdings of foreign currencies and gold hit a record $221 billion last month.
Analysts say Turkey-US ties could strain further if Biden is elected and as expected toughens the US stance against Ankara鈥檚 military interventions abroad and its crackdown on dissent at home.
鈥淭o differentiate his administration from Trump鈥檚, Biden would pay more than lip service to things like human rights, rule of law and democracy. That will be the real pressure on Turkey,鈥� said Soli Ozel, lecturer on international relations at Kadir Has University in Istanbul.